The Latest Global Down-Turn (or whatever the latest buzz word is) 1

I still don't know what the "credit crisis" actually is. My mortgage hasn't really changed, my credit card interest rate (academic really) may have gone up (don't know). Some things cost more (unrelated I suppose). Sounds like hype to me.

All I can think of is that some people who assumed they could borrow huge amounts of money find they no longer can. Why is that a crisis?



- Steve

You probably won't feel the "credit crisis" until you try to buy or sell real estate.

Here they still have openings for power engineers. So the slowdown hasen't been an issue.

No effect at all.

I'm in New York, USA, and as far as the job market, I can't say it has been bad.

However, I'm looking to buy a house, and that's where I can see a "credit crisis" of sorts. I haven't been a a working engineer for very long, and therefore, don't have access to a lot of cash for a down payment. Without going into much detail, people think that there house is worth a lot more than it is, and cling to this notion. With a higher house price, comes a higher down payment (which I don't have--not many younger buyers do.) So if you have a WHOLE LOT of people who need to sell (but won't sell below a certain price, which is outlandish for the most part), and a lot of people who want to buy, but can't get a decent mortgage that they can afford... you have a credit crisis--at least in real estate.

V

Well, there's no real crisis there that I can see. Young people can't buy - they'll have to save their money, or tap retirement plans to come up with the money. People with inflated prices on homes will have to sit tight and wait for buyers (and anybody who bought a house intending to sell again in less than 5 years is a speculator in my book), or lump it and sell at a loss. Life goes on. This whole "no money down" mortgage thing is a loopy mess, but the only people being really hurt by it are the speculators, and the real-estate agents. I don't cry for either breed of parasite.

btrue, any chance you could convince my wife about the no money down thing;-).

KENAT, probably the least qualified checker you'll ever meet...

From what I gather, the "credit crunch" will prevent small business from borrowing for growth. Without the capital, it cannot hire people and buy equipment. The banks are just not taking the chances and the Small Business Administration has less money/tighter underwriting standards.




Don Phillips

I think that the 'credit crunch' in the UK has been a long time coming and, for many average householders, is to do with borrowing on the basis of the increase perceived in property values.
Where this 'borrowing' has been used purely to fund that £30k car or that month-long holiday to Hawaii or that time share in Spain, there's nothing of lasting value to show for it and when the market value of their "property" (I call mine my home) falls, they're shelling out real money for things that have little value.

My first married home cost about 4 times my annual income.
That same house now sells for about 5½ times the equivalent job income, say a 37% increase in 'value' that some mugs would borrow against, just to fritter away.


Bill

In the UK it is the greed of the money lenders un-regulated (or unenforced) by the government.
It used to be that you had to have a substantial deposit and you could then borrow twice annual income. Of course, this meant your choice of properties was pretty limited.
So then they start to lend more, and to help out those first few years, special interest rate deals so you could afford to pay a higher mortgage while your income wouldn't support the true value.
SO there is the first assumption:
that as time goes by income will increase to help pay the mortgage.
But, as income increases, so too do expectations. Of course, when you have sat in a house for a while, the price goes up due to supply and demand. SO you ow have equity to boost the deposity value for the next.
Increasing property value is the next assumption In fact, on occassions, it can go down.
That property values haven't gone down so foten as one would expect is because the money lenders have more money to lend.
Now you can borrow more than twice income and you need a smaller deposit.
Of course, this doesn't mean you can afford a better house, it just means that there is more money comp-eting for the same house and the effect of lending more moeny is to increase the selling prices, not to increase the borrowers range of options.
Then we come to self certification. The day they put "financial advisers" into estate agents was a bad one.
Theoretically, you had to prove your income. However, some self employed people could self-certify. This meant that some people would see a property they wanted, work out what they needed to borrow, work out the income they needed to show to get that money and that is the amount they'd certify. It would appear (and I have been told this myself by an "advisor") that they do not check too closely.
Why? because the lenders money is safe.

Why is the lenders money safe? because they lend only part of the property value. So if the borrower defaults on day one they can get their money back and all that is at risk is the borrowers equity or deposit. (Sadly, sales of repossessions are managed by the lender which means that so long as they get their money back they could care less about the borrowers deposit).

Now we come to the next problem.
Because house prices have been rising and rising significantly, the borrowers need more money and the lenders need to lend more.
Every one is pursuaded that house prices can only rise.
Enter the 100% mortgage. Lenders are so convinced that prices can only rise they forget that they are the ones responsible for the phenomenal house price rises so they are convinced that even if the borrower defaults at once the months that have elapsed since the sale was agreed and the default the price will have risen by a few thousand (especially as part of the borrowed amount probably includes improvements).

Now comes the crunch and the whole house of cards start to tumble.
But, where will it end up?
What is the true price of a house?
The victims are not all speculators. Yes, there have been some who decided that because property prices were so rapidly increasing they would borrow every penny they could, modernise the property and then sell it on for a fast profit.
Now enter TV. Once it was cookery shows, then it was holiday shows then gardening. Now it is property development. Countless shows looking at buying and selling, buy to let, in short, how to be a "property" tycoon with no other skill or resource than aspirations and access to easy money.

In the UK many many simple people have been caught out because of the combined greed of the property speculators and money lenders but mostly a lack of regulation by government which for years abdicated its responsibilities.


JMW

My father was a financial advisor. My college buddy was an Asset Secutitization lawyer (unitl he married his boss and retired, but that's a different story).

Neither of them could explain in terms that an engineer could understand/believe where the money comes from when you sell a house at a higher price than you bought it for. When I bought my house ten years ago I paid £86k for it. It was recently valued at £230k. So if I were to sell it and buy another similar house, no "real" money would be created or destroyed - the "value" is purely theoretical. If I were to sell it and spend the proceeds on fast cars, women and holidays, the "value" becomes real. The system has coughed up £150k for me to burn and then I go back to renting.

My question is: Who has contributed to my £150k spending spree? It's real money.


- Steve

Securitization, damn fingers!

- Steve

On the West Coast, USA, we're seing a slow down of public jobs (water treatment, wastewater treatment, etc...)

As people's houses are "worth less" there's less tax revenue for cities to spend on project. Also most cities plan projects on future growth. As those growth numbers have been lowered, lots of projects have been cancelled.

It hasn't really hit me personally yet. My company was too busy to begin with, so we're just now getting to a comfortable level (lots of projects cancelled).

On the private side, there are fewer developments and high rises being planned, which has reduced the backlog in that area. Again, most companies were overloaded, so I don't think anyone will be going home empty handed.

btrueblood said:

but the only people being really hurt by it are the speculators, and the real-estate agents. I don't cry for either breed of parasite.

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That's simply just not true. There are first time buyers that are being hurt by it, whose only mistake was trying to buy a house at a time when the sh*t hit the fan because stupid people bought houses they couldn't afford, and were financed by lenders who should be fired, and then shot. I assume you're a home owner, btrueblood. This means that you don't have to worry about buying a house, and even if you did, you'd have the equity in your house (assuming you bought it at a lower price than it's presently worth) to put a nice down payment on a new house. Believe me, I'm not trying to argue with you, and I agree that the speculators and unsavory lenders should go jump off a bridge, but I'm just relaying personal experience, because I'm really annoyed that I can't get a decent mortgage on an overpriced house because I don't have $30,000 in cash.

V

I would love to be a first-time buyer right now. A buyer's market (especially in foreclosures) with no house to unload... how does it get better? Maybe by waiting for the bottom to fall further...

The downside is that it is harder to get a decent mortgage. The easy money is gone.

vc66, I'm not trying to justify it, but the old rule was, as jmw stated, that you needed to come up with 20% down and could borrow no more than 2x your annual income. That's how my wife and I had to do it back in the day. We managed to find ways to scrounge that money a little quicker, but it took us 2 years of living cheaply and saving pennies before we could afford to buy. We didn't buy ANYTHING in those 2 years that we didn't need; no new dress for her, no toys for me, no cars/bikes/cameras/tvs/vcrs etc. etc.

"...because I'm really annoyed that I can't get a decent mortgage on an overpriced house because I don't have $30,000 in cash. "

Yes, the change from the old rules to the "new rules" of no money down, and now back again, causes you to not be in a house today (somebody "moved your cheese"). Sorry for that, but you aren't really hurt, just "annoyed" (you are out no money, and thank your luck that you aren't in a home now, that you can't afford, and looking at the only option being defaulting on your loan because you lost your job, or got sick). There are people in my shop who bought a year ago, and are "upside down", and they are worried...but: they bought their houses to live in, and the value of the house as a house has not disappeared. They will struggle, but likely be alright. They may eventually be out some money when they have to sell in 5 or 10 years, but not as much as if they planned to sell the place in less than a year, expecting to make a profit on a place that they couldn't make the mortgage payments for in the long term anyway (house flippers = speculuators in my book). Being upside down on a house or any other credit purchase is not a new thing, it is the RULE for ANY credit purchase: you are BETTING that you will have money in the future that you don't have now. There are many ways for that not to be true, and you should be prepared to deal with the consequences should those bad things happen.

Yes, I'm in a house today, it is our second home. Its value doubled or better since we bought it (in funny-money terms, we've never even considered selling, but homes around us have), but I expect prices to drop back to normal in a few years, once the bubble in the Pac. NW pops, and it will, eventually. We didn't buy the house expecting to make a profit, we bought a place to live, expecting to spend the next 20 or 30 years here, raising a family. Even if we end up "upside down" relative to what we paid for it originally, we still received the value of living here for the last 15 years. And, we didn't sit on our butts paying the minimum payment on a 30-yr. mortgage, either. The best time to make double payments is when you and your mortgage are young. It also hurts the most then, because all of your friends are out spending their home equity loans on fast cars, trips, etc. It hurts to do the smart thing, and delay gratification. But we owe less than 1/3 of what we paid for the house now, so we are comfortable...now. When that mortgage was hanging over my head, I was worried and had trouble sleeping, and put up with a lot more crap from my bosses...and worked my rear end off to make all of that go away.

So, sorry for you vc66, but I'm not crying for you either. Shag your ass, earn some extra money, get your husband/boyfriend to take a second job, cut corners, eat macaroni -- do what you need to do. 30k is what, half your annual income or less (I'm pretty sure there's two of you from what you've said elsewhere in these fora). What would you say if I told you that you should have a MINIMUM of 1/2 your annual income in savings? What would the two of you do today if you both lost your jobs, how much do you have saved up? What if you got sick, how would you pay bills? Do you have a household budget, do you stick to it? How many espressos do you drink at Starbucks each day, do you eat out several times a week? Not that I care about any of that, nor am I picking on you (as an engineer, your finances are likely well managed compared to a lot of people). But there are always ways to cut corners and save some money, it just depends on how much you really want to.

vc66,

Also, I forgot to add: my wife and I had to walk a mile to the mortgage offices, in the snow, uphill both ways....

In other words, forgive a COF his ranting...

btrueblood said:

get your husband/boyfriend to take a second job

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What the hell gave you the impression that I'm a woman?!

Believe me we're saving every penny, but you're definitely right in saying that I'm not hurt, just annoyed. And to clarify what I meant about people who bought houses that they couldn't afford--I'm talking more about people who took the easier road with ARM's, not necessarily the people who unfortunately lost their jobs, got sick, etc.

I appreciate your rant, but, in all fairness, I hate Starbucks.

V

Man btrue, if I could just get you to explain some of that to the Mrs...

That said, I wonder how the ratio of house price to salary has changed and if it's made it harder.

Here in Santa Barbara to hit a 20% down payment I'd need close to twice my annual salary even for a pretty basic, maybe even fixer upper. Fortunately back in the Desert where I spend my time when not working it's less than 1 years pay to hit 20%. Heck if BRAC don't hurry up it may even hit half.

KENAT, probably the least qualified checker you'll ever meet...